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Facts Not Hope: Why Some Altcoins Won’t Die

September 6, 2019


Facts Not Hope: Why Some Altcoins Won’t Die

While bitcoin’s increasing “market” dominance (as measured by a questionable metric called “market cap”) to over 70% has led some observers to call the impending death of altcoins, is there a real basis for this?

Surely, there are some coins which are, indeed, not coins at all but rather little more than pre-mined hashes and a dream, whether they’re built on an ethereum platform (the ERC20 or ERC751 tokens) or not.

Yet there are tokens which have real uses, and uses generate value. There is some great technology, some great use cases out there, but it’s getting lost among the noise of the speculators across the planet who care only about trading.

There’s an old saying from the sports world: Don’t confuse activity, with achievement.

With that in mind, understand this: The trading price of those tokens may not accurately reflect that value.

Nor should it, I say.

The tokens may be overvalued — and some are going to be grossly undervalued too! But why the mistake in the first place? This valuation conundrum arises from a fundamental, and epic, misunderstanding of the nature of both tokens, and of the inappropriate and often-entirely incorrect analogy between tokens and securities.

Those of us who understand securities (and I am an American securities lawyer by training) also know that it’s important to recognize that there are different kinds of securities.

Traders don’t give a damn what they’re trading, so they naturally ignore this topic. But securities behave differently based on their nature, and the market values them differently, too, depending on the perspective or objective of certain types of investors.

A company’s debt security gets valued based on the company’s likelihood of repaying the debt and of generating an income stream on top of that. An equity security gets valued (theoretically, at least) by “value investors” based on the company’s intrinsic current value, while “growth investors” will look for future appreciation.

Many tokens are simply not equity securities. They can be valued on a “value” basis for current utility or, more commonly, a “growth” basis for future anticipated growth. Tokens which give access to a system (e.g., Ether which pays for gas to power the Ethereum system) are appropriately valued for the utility of the token.

In that case, the token is really not a security. It is a distinct product — no different from software programs we all grew up with. So what should the token price represent? It should be the value of that product.

The proper analogy is to use the worldwide tech company Apple Corporation. An equity shareholder would own a stake in the value of the entire company. A tokenholder’s analogous ownership would be that of owning an iPhone. The tokenholder owns a product. That explains why tokenholders generally do not (except in very rare cases of declared security tokens) have any rights similar to equity shareholders, with no rights to vote for managers, approve major transactions or receive income distributions.

This is why, whether you buy one iPhone, or one thousand of them, that purchase doesn’t give you the right to tell Apple management how to run its business.

Now, consumer products come and go. Some become big successes and — as with Apple’s multiple iPhone versions — can engender multiple waves of revisions, updates and related products. Others are rejected by the market. Yet to say that an altcoin token creator will not be successful because its altcoin token is selling at a certain price today that’s a fraction of its earlier price, or whatever, is no different from saying that Apple is now a failure because demand for a particular model of one particular product (e.g., the iPod) is down.

Why assume that token issuers are the equivalent of one-trick ponies? Surely many tokens have no real proprietary technology behind them, but others do and can and should produce multiple products or uses. Those will be — and in some cases, are — the tokens which have a present tangible value and whose value may rightfully grow over time.

There are undoubtedly many readers who have overpaid on a value metric for tokens. However, there are others who are scooping up these tokens, operating both on a growth-investor basis (believing in the crypto ecosystem’s boundless potential) and value-investor basis (assuming a sharp discount from “real” value).

Finally, there are organizations whose value is simply not measured by the current trading price of their tokens. However, that is a function of the nature of the tokens. They do not represent the issuer; they hold a discreet value arising from functionality (or access). While ether may be trading currently at approximately one-half what it used to earlier in the summer of 2019, can anyone seriously question the value of Ethereum as a project?

I suggest that tokens should not be valued as securities and definitely not as equity securities. The appropriate analogy is to view them as commodities in order to properly assess their value for utility and, for tokens resting on a firm technological foundation, the value of that innovation.